The major indices turned in excellent performances across the board in 2003, but began the new year mixed as the Nasdaq Composite closed 0.2% higher, but the S&P 500 and Dow Jones Industrials both closed approximately 0.3% lower. After consolidating during the two preceding days, the major indices gapped up to new highs on Friday morning and initially showed strength during the first ninety minutes of trading. However, minor selling intensified during the late afternoon session and caused the major indices to not only give back their intraday gains, but also broke below the lows of the prior two days. A small wave of buying during the final thirty minutes prevented the indices from closing below their respective lows of the prior two days, but the mid-day reversal and selloff to new three-day lows was bearish regardless. While Friday’s actual losses of both the S&P and Dow were minor, it’s important to realize that the closing prices represented a drop of 1% from the intraday highs that were formed in the morning. The Nasdaq Composite, which closed the year 2003 at a price of 2003, showed slight relative strength on Friday, but still closed 0.8% off its intraday high.
As traders began returning from the holidays on Friday, volume increased by 30% over the previous day in the NYSE. However, volume actually dropped 3% in the Nasdaq. Since both the S&P 500 and Dow Jones Industrials closed the day with losses and the Nasdaq closed with gains, this was exactly the opposite type of volume pattern the bulls would want to see. It means that selling volume increased in the NYSE, while buying volume decreased in the Nasdaq. Ideally, bulls would have wanted to see lighter volume in the indices that closed lower and heavier volume in any indices that closed higher on the day. Obviously, we cannot draw any major conclusions from only one day, but Friday’s bearish intraday reversal, combined with the bearish volume patterns, should serve as a yellow flag to bulls as we enter the new week.
Friday’s bearish reversal day left the major indices in “no-man’s land” going into the coming week. While the broad market is still very close to its 52-week highs, Friday’s failed breakout created overhead price resistance that is likely to cause any rally attempt to become rather choppy. Below is an hourly chart of SPY (S&P 500 Index) that illustrates the potential “chop zone” you need to be aware of:
As you can see, the “no-man’s land” is the range from about 110.70 to 111.50 on SPY, which equates to a range of 1103 to 1111 on the S&P futures. Notice also how the 40-MA on the hourly chart acted as support on Friday, while the 20-MA subsequently acted as resistance. As long as the S&P remains in the aforementioned range, we would NOT look to initiate any new SPY positions because it is likely to be choppy and range-bound. Obviously, a break above Friday’s high would be quite bullish, especially if volume correspondingly increases. However, a break below Friday’s low (and the 40-MA/60 min.) would confirm a failed breakout after three days of consolidation, which would probably cause the S&P to correct back down to its 20-day MA. For your convenience, we have illustrated the similar “chop zones” on charts of DIA (Dow Jones Industrial Average) and QQQ (Nasdaq 100 Index) below. You may wish to make note of the price ranges of the projected “chop zones” to assist you in your trading today:
Did you notice the major weakness in the Home Builder sector on Friday? Hopefully some of you took initiative to short the sector after we showed you the index’s bearish head and shoulder pattern in Friday morning’s Wagner Daily. The U.S. Home Builder Index ($DJUSHB) sold off sharply on Friday and closed below both its 20 and 50-day moving averages. This made the head and shoulder pattern even more pronounced and increased the odds that the sector will at least test support of its neckline, which is at the 550 area. If the neckline of 550 is broken, our target remains the 500 area. The daily chart of $DJUSHB below illustrates Friday’s break of major support as the index rapidly descends to test its prior lows:
As you can see, the index has been getting hit pretty hard over the past couple of days. While it is likely to correct over the next day or two, all signs point to lower prices in the intermediate term. We netted a 6-point gain by covering most of the shares in the CTX swing short that was called in the Intraday Real Time Room last week, and we also netted several points of profit in two other homebuilders that we shorted as day trades on Friday.
The nanotech sector has been running sharply over the past week, with many stocks doubling since we first mentioned the sector only a week ago. We have not spent much time discussing the sector because there is not an associated ETF, but individual stock traders may be interested in stocks such as NGEN, NANX, ALTI, and TINY, each of which we have also been discussing in the Intraday Real Time Room. Obviously, the sector is highly speculative, but has been quite profitable for many of our subscribers over the past week. This is just a courtesy heads-up.
With all the institutional traders and professionals returning from the holidays this week, volume should at least return to average levels. The big question, however, is whether the institutions join the buying spree that occurred during the holidays or whether they sell into strength. Because of this, we feel the market’s direction in the coming week is likely to set the tone for what to expect throughout the remainder of the month. Either way, we will be happy just to see volume return because it will increase the odds of new trade entries following through in the right direction.
Today’s watch list:
SMH – Semiconductor HOLDR
Trigger = below 41.20
(below the two-day low)
Target = 38.60 (retest of December low)
Stop = 42.20 (above Friday’s high)
Notes = The Semiconductor Index ($SOX) continues lagging behind the broad market, as you can see from the daily chart above. We will look to short SMH only on a break of its two-day lows.
Daily Reality Report:
Below is Morpheus Trading Group’s daily
performance report of closed trades and an update on all open positions from The
Wagner Daily (Intraday Real-Time Room trades are reported separately in The
Wagner Weekly). Net P/L figures are based on the quantity of shares represented
in the MTG
Position Sizing Model.
We are all cash.
Founder and President